Understanding Tax Increment Financing (TIF)

Tax Increment Financing is an economic development, redevelopment, and housing development tool that was authorized by the State of Minnesota in 1979 for cities, counties and other local authorities to use to offset certain development and redevelopment costs. For local units of government to implement TIF for certain projects, the unit must find that it serves a public purpose, which includes removal of blighted areas, addition of low-to-moderate income housing, wage and employment opportunities, and bolstering the local tax base. As part of the public purpose, the local unit of government must include a statement of finding related to a “but-for” test. The “but-for” test simply means that if not for this assistance, this project would not be undertaken by the developer.

When implemented for a project, Tax Increment Financing will capture the increase in taxes for the new project as the incentive for the development. The tax difference (also known as the increment) is returned to the developer as an incentive to do the project. Local governments do not lose any current revenues when utilizing TIF. The local unit of government simply foregoes new taxes for a temporary period of time to assist a project that would not have happened otherwise. Often times, we narrowly discuss future property taxes as the only benefit of new projects. We must include a broader view of benefits of the project. For instance, new projects generally provide new job opportunities, extend public infrastructure, and remove substandard property conditions.

Every year cities and counties are required to report their TIF activities to the Minnesota Office of State Auditor (OSA) for monitoring, compliance, and data collection. According to the League of Minnesota Cities from information compiled in 2014, it is estimated that 4% of Minnesota’s total tax capacity is captured in TIF Districts. In comparison, roughly 6% of the City of Alexandria tax capacity is captured in TIF districts, slightly higher than the state average. The captured tax capacity measurement is one of the more common statistics used to hold local units accountable for the application and use of TIF for development projects.

Through our assistance, our elected officials have relied upon and challenged the AAEDC to uphold that all TIF projects meet the public purpose and requirements for the respective district. However, our elected officials have the most difficult policy decision, making sure that the TIF incentive is in the best interest of our communities and our county.